Beyond savings : how to measure procurement value fully

"How much did you save this year?"

In many companies, when procurement performance is measured, it's often based on a single criterion: savings.

And while savings are important, focusing solely on them is like driving a car by only looking at the speedometer.

You're going fast... but where to? And at what cost?

In this article, I'll show you why procurement performance goes far beyond the savings figure, how to measure the overall value you create, and most importantly, how to escape the trap of cost reduction at all costs.

How to calculate a procurement saving: a worked example

Before widening the scorecard, get the basic calculation right. It takes three numbers: a reference price, a negotiated price and the actual volume.

Formula: realised saving = (reference price − negotiated price) × actual volume for the year.

Example. A cleaning contract. Last year: 1,000 interventions at €120, so €120,000. You renegotiate to €108 (−10%). This year, activity rises to 1,150 interventions.

• Spend this year: 1,150 × €108 = €124,200. It went up by €4,200.
• Price effect: (108 − 120) × 1,150 = −€13,800. That is your realised saving.
• Volume effect: (1,150 − 1,000) × €120 = +€18,000. It comes from higher activity. Procurement has nothing to do with it.
• Check: −13,800 + 18,000 = +4,200. It adds up.

Your CFO sees a line that went up by €4,200. You saved €13,800. Without this split, the saving does not exist in the P&L, and the conversation ends there.

The rule to keep: always calculate a saving on this year's actual volume, never on last year's. And freeze the reference price with finance before the negotiation starts.

To run the calculation on your own categories, use the indirect savings estimator.

Savings vs Cost Avoidance: Understanding the Difference

Savings

Definition: Tangible and measurable reduction of an existing expense.

Example: You renegotiate a maintenance contract. The price drops from €100k to €90k.

Saving: €10k (visible on the P&L)

Characteristics:

• Immediate impact on the income statement
• Easily measurable
• Indisputable (before/after invoices)
• Valuable in direct ROI

This is what matters most... in the immediate term.

Cost Avoidance

Definition: Prevention of a future cost increase.

Example: Your supplier announces an 8% increase for next year. You negotiate an indexation capped at 3%.

Cost avoidance: 5% avoided (but no visible decrease on current invoices)

Characteristics:

• No direct P&L impact
• More difficult to measure
• Requires a counterfactual scenario ("what would have happened if...")
• Often contested by finance

The problem? Cost avoidance is often ignored or minimized, even though it represents real value.

Why Both Matter

A buyer who only generates cost avoidance risks not being recognized.

A buyer who only generates savings risks weakening the company in the long term.

True performance? It's about balance.

Procurement ROI: The Metric That Matters... But Not the Only One

How to Calculate Procurement ROI

Formula:

ROI = ((Savings - Procurement Function Costs) / Procurement Function Costs) × 100%

Example:

• Savings generated: €5M
• Procurement function costs (salaries, tools, travel): €1M
• ROI: (€5M - €1M) / €1M = 400%

Benchmarks:

• Excellent ROI: 300-500%
• Good ROI: 200-300%
• Average ROI: 100-200%
• Low ROI: <100%

Translation: For every €1 invested in procurement, you generate €4 of value.

It's a powerful argument to justify the existence and development of the procurement function.

Why ROI Alone Isn't Enough

As mentioned earlier, focusing solely on savings cannot suffice and can even lead to deviant, counterproductive behaviors.

Scenario 1: Toxic ROI

You generate €10M in savings with a 500% ROI.

But:

• Your defect rate has doubled
• 3 strategic suppliers are in financial difficulty
• You've lost 2 months on a key product launch

The ROI says: success. Reality says: disaster.

Scenario 2: Invisible Value

You deploy an e-procurement platform that reduces lead times by 40%.

You secure 3 sources of supply for a critical component.

You integrate sustainability into 80% of your contracts.

The ROI says: €0 (no direct savings). Reality says: strategic transformation.

Conclusion: Procurement ROI is necessary, serving as the basis for measuring procurement performance. While this indicator is key at the beginning, it becomes less important as the team matures. Maintaining a positive ROI remains key in many situations, although strict risk management in certain industries means a low ROI for procurement and that's OK — as long as overall performance is evaluated.

The Trap of Savings at All Costs

How You Fall Into the Trap

It often starts innocently:

• Year 1: "Procurement must generate 2% savings on spend."
• Year 2: "You did 2%? Perfect. This year, we want 3%."
• Year 3: "3% again."
• Year 5: "We still want 3%... but we've already negotiated everything."

Result: To maintain savings, you start to:

• Over-challenge suppliers (who break or deliver poorly)
• Downgrade specs (at the expense of quality)
• Delay investments (innovation, tools, processes)

It's the negative spiral.

Collateral Damage

1. Quality Erosion

Real case: An automotive manufacturer demands 5% annual reduction on parts.

Result:

• Suppliers reduce quality controls
• Defect rate goes from 0.5% to 2%
• Cost of recalls: €50M

Procurement savings: €10M. Total cost: -€40M.

2. Supplier Fragility

Real case: A tech company pressures its suppliers on margins.

Result:

• 2 suppliers go bankrupt
• 3-month supply disruption
• Cost of launch delay: €100M in lost revenue

Procurement savings: €5M. Total cost: -€95M.

3. Loss of Innovation

Real case: A retailer refuses any price increase, even justified ones.

Result:

• Suppliers stop investing in R&D
• No new differentiating products
• Loss of market share: -15% in 2 years

Procurement savings: €3M. Strategic cost: priceless.

The Symptom: When Procurement Becomes a Cost Center

If your management only sees procurement as a cost reduction item, you're in the trap.

Procurement becomes a cost center instead of a value center.

And that's when everything breaks down.

Keys to a Balanced Approach

To avoid the trap and measure true procurement performance, three fundamental pillars are necessary:

01. Clear Indicators & Validated Methodology

Why it's essential:

Precise definitions are the foundation of everything. You can't manage what you can't measure.

What this implies:

• Shared definitions: What is a "saving"? A "cost avoidance"? How do you calculate ROI?
• Documented calculation rules: What baseline? What comparison period? What costs included?
• Clear scope: Which purchases are in scope? Which are excluded and why?
• Validated methodology: Finance, operations, and management must approve the method before applying it

Concrete example:

You negotiate a 3-year contract with a 5% reduction in year one, then 2% indexation in subsequent years.

Without clear definition:

• Procurement counts 5% savings every year (on initial base)
• Finance contests and only counts the first year
• Conflict, lost credibility

With clear and validated definition:

• Year 1: 5% savings (vs baseline)
• Year 2: 3% savings (5% initial - 2% indexation) or cost avoidance depending on agreed definition
• Year 3: same
• Everyone agrees from the start

02. Transparent Reporting

Why it's essential:

Transparency builds credibility. Regular validation sessions between finance and procurement are scheduled.

What this implies:

• Monthly or quarterly reviews: Savings are presented and challenged
• Systematic documentation: Each saving has a "business case" with source, calculation, validation
• Complete traceability: Before/after invoices, contracts, approvals
• Financial alignment: Procurement savings are reflected in the P&L or explained (timing, scope)

Concrete example:

Bad practice:

• Procurement announces €2M in savings at year-end
• Finance asks for proof
• Several weeks to find elements
• 40% of savings are contested
• Credibility = 0

Good practice:

• Shared Procurement-Finance dashboard updated monthly
• Each saving documented at the time of realization
• Quarterly validation session of 2 hours
• -Adjustments made in real-time
• No surprises at year-end
• Maximum credibility

03. Balanced Objectives Aligned with Strategy

Why it's essential:

Procurement KPIs must reflect the function's overall contribution and be aligned with company priorities.

What this implies:

• Mix of indicators: Not only financial, but also operational, strategic, and resilience
• Weighting according to maturity: An immature procurement function focuses on savings. A mature function balances all pillars
• Strategic alignment: If the company prioritizes innovation, procurement is measured on its contribution to innovation
• Adaptability: Objectives evolve with context (crisis = resilience, growth = innovation, difficulties = cash)

Concrete example:

Unbalanced approach:

• Single objective: 3% savings on spend
• Result: Savings achieved, but quality degraded, innovation stopped, suppliers weakened
• Negative overall impact

Balanced approach:

• 2025 Procurement Objectives:
• Financial (40%): 2% validated savings + ROI >300%
• Operational (25%): P2P cycle <5 days + On-time delivery >95%
• Strategic (20%): 70% of spend with ESG criteria + 3 supplier innovations integrated
• Resilience (15%): No critical disruptions + Dual sourcing on key components

Result:

• Balanced performance
• Contribution to overall strategy
• Recognition of total value
• Transformation from cost center to value center

In Summary: Transforming Procurement from a Cost Center to a Value Center

Savings matter. a lot.

But they are only part of the value that procurement creates.

True procurement performance rests on three pillars:

With these three pillars in place, you avoid the trap of savings at all costs.

You measure the true value you create.

You transform procurement from a cost center into a value center.

And that's the true role of procurement.

Frequently asked questions on measuring procurement savings

How do you calculate procurement savings?

(Reference price − negotiated price) × actual volume for the year. The reference price is the last price paid, or the weighted average over the past twelve months when prices moved.

What is the difference between savings and cost avoidance?

A saving lowers an existing spend and shows on the invoices. Cost avoidance stops an announced increase: the supplier asks for +8%, you cap indexation at 3%, 5 points are avoided. Track both, on two separate lines.

Why did my spend go up when I negotiated a lower price?

Because of the volume effect. When activity grows faster than the price falls, total spend rises. Separate the price effect from the volume effect before you present your numbers.

How do you calculate procurement ROI?

ROI = (savings − cost of the procurement function) / cost of the procurement function. With €5M of savings for €1M of cost, ROI is 400%.

To estimate what your indirect spend can give back, category by category, use the indirect savings estimator.

And you, how do you measure your procurement performance? Have you implemented a balanced approach?

🙋🏻‍♂️ I'm Alex, a procurement expert passionate about structuring procurement practices and creating sustainable value.

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